Zynga (ZNGA) went from founding to IPO in four years during the greatest financial crisis in the last century.
How? It piggybacked on Facebook (FB).
I'm not taking anything away from its success. It saw the opportunity to do so in gaming before anyone else and it leveraged it to the hilt. Nobody else did.
It was so successful in converting Facebook members to spend hours at a time on its games that it became a very material part of Facebook's overall sales.
People now forget it was only last year that people used to wait for Zynga's earnings as a key indicator for how Facebook's quarterly results were going to be.
And in Zynga's last quarter, although it has consciously made an effort in the last four quarters to move to mobile and away from Facebook's Web platform, it still garners 80% of its revenues from Facebook.
So, a key determinant of the stock's future growth will be whether it can tangibly prove that it is growing its mobile revenues to more than make up for their older Facebook revenues (which are still higher margin).
To that end, the company has been doing a couple of things. News came out this week that the company planned to release Draw Something 2. That's not unusual, as it normally tries to extend its franchise games to many sequels to maximize its revenue stream from them. But its announcement was that it would fundamentally improve the new version of Draw Something to be much more social and somewhat of a social network itself. This will be key to Zynga's shift to mobile to deliver hit games that uniquely work in a mobile and social context. Such games will be much stickier and profitable.
The second big deal in terms of Zynga's longer-term potential came in an announcement it made yesterday. Its Zynga.com network now no longer requires a Facebook sign-in. You can sign in independently. This is important in a couple of ways.
Firstly, Facebook was taking a 30% cut of any money flowing to Zynga from its users playing Zynga games. Although this was a fair trade when Zynga was riding Facebook's rocket ship of growth, Zynga now needs all the money it can get to grow its top line again.
Secondly, Zynga needs to be more than just a producer of a series of hit games. If it is truly going to grow with the benefits of network effects, it needs to create a Zynga platform. That means there has to be some extra reason for existing Zynga players to play a new Zynga game when it is introduced vs., say, a Rovio game. This could be because they know a bunch of other Zynga players already and want to chat with them or do some other type of communication with them. It could be because they already have a Zynga account filled up with credits that can be applied to the new game, etc.
If Zynga can somehow crack this mobile platform code the way it cracked the Facebook Web code, there will be huge growth for the company. But it will be a tougher road. Mobile is inherently more fragmented compared to the way it grew on the Web.